Asia has more billionaire cities than any other region, according to data released in November by Wealth-X and UBS. Hong Kong, Mumbai, Singapore and Beijing are the richest cities in Asia. This year 18 new billionaires were created in the region the highest growth rate in the world. China alone has 157 billionaires (the US has 515).
Asia also has the fastest rate of wealth growth. Wealth-X forecasts that Asian wealth will overtake Europes in 2017 and its ultra-high-net-worth population will overtake Europes by 2021. Total Asian UHNW wealth is predicted to overtake that of the US in 2024 and the total Asian UHNW population is expected to exceed that of the US in 2032.
Its easy to see why so many banks looking for revenue growth in their private banking divisions have set their sights on expansion into Asia. Hong Kong and Singapore have a combined UHNW wealth of $690 billion, just below Switzerlands $750 billion.But is it all an illusion? Some private banks are struggling to make a profit and a wave of consolidation seems to be unfolding, with more sellers than buyers.
|Bassam Salem, chief executive of Citi Private Bank Asia Pacific|
"Figures that show Asias wealthy population to be booming are misleading," says Bassam Salem, chief executive of Citi Private Bank Asia Pacific. He says that consultants point to data on the number of high-net-worth individuals in Asia and advise private banks to set up in the region but their data are not a true reflection of the business opportunities available. "Because of real estate appreciation in Asia there are many more millionaires; also the appreciation of small businesses has led to many more millionaires but those are not bankable assets," says Salem. "So private banks set up here thinking there will be thousands of clients; only they cant find any."
Salem also points to the costs of compensation and real estate as further drags that adversely affect the profit growth private bank heads expect in Asia. Property prices have doubled in Hong Kong, for example, since the end of 2012 and banks are facing steep costs to remain in Hong Kong Central or Kowloon. With regards to compensation, there is just too little talent to cope with the growing number of clients and so banks face high costs in attracting senior bankers or training advisers.
The inability to make Asia private banking a profitable business is forcing some banks to sell. Merrill Lynch in Asia was purchased by Julius Baer for example. Société Générale is selling its Asia private banking business. It manages around $13 billion. DBS, Credit Suisse and ABN Amro have been reported as being interested buyers although none will comment.
Whether or not it would be a good purchase is the subject of debate among senior private bankers in Asia. One points out that no bank would admit to being in the market for the arm because that would cause its stock price to fall. "It would most likely take 12 years to make a profit out of the business, and who would commit to that?" asks one banker.
Another banker at DBS, who says he has no insight into whether or not his own bank has made an offer, argues that the acquisition would only make sense to a bank that is going to be in Asia for the long term. "That would be an Asian domestic player," he points out. A deal, expected to come in at around $400 million, could be announced imminently.
Other private banks for sale are BSI, the Italian insurer Generalis private banking business. That has been on the block for over a year with no takers so far.
"Profitability is often overlooked by those rushing out [to Asia] to capture this opportunity," says Salem. "Many underestimate the scale required to address an environment that has become more regulated, coupled with a client base that has become more savvy and more global. Thus many players end up over-investing or over-paying without getting any real return or even a foothold in the region. The ability to do well in a sustainable way in this market requires scale, knowledge and experience, and very few banks can really check all these boxes."
Marathon, not a sprint
Francesco de Ferrari, head of private banking, Asia Pacific, at Credit Suisse, says consolidation is inevitable. "Building out business in private banking in Asia is a marathon and not a sprint; it takes time and has to be done in a sustainable fashion. Players who might be pressured at head office in Europe in terms of results and come to Asia as a possible solution to their revenue and growth issues in the old world dont last very long if they cant deliver profitability. According to various industry research, the average cost-income ratio of the private banking industry in Asia is in the mid-80s this means that the big players may be profitable, while most others may be losing money."
De Ferrari also says that balance-sheet and investment capabilities are crucial to building a profitable business in Asia. "The majority of the client base in Asia is still first-generation entrepreneurs who are very involved in their business. They need, firstly, a bank with a lot of balance sheet to lend to clients and partner with them at the initial phase of growing their business and, secondly, a strong investment bank to be able to do big single-stock concentrated lending positions. This requires strong equity derivatives, or emerging markets financing capabilities that can take illiquid collaterals and structure loans around them."